Notes international economics and
international economic
organizations
Class 1: introduction – 30/09/2025
I. international economics: a global public goods approach
Private goods = good that are produced by the market mechanism (market
mechanism = supply and demand determine the price of the good)
-> most goods can be produced through the market mechanism because they are i)
excludable and ii) rivalrous meaning that i) if you don’t pay the market price, you can
be excluded from the consumption of that good and ii) If you consume the good the
good is no longer available for others to consume
However, there are also goods/ desirable things to be produced, for which it is not
possible/ straightforward to use the market mechanism to make them because they
are i. non-exclusionary and/or ii. non-rivalrous meaning that i. when they are
produced you cannot exclude people from benefiting from the good even if they do
not pay and/ or ii. even if you consume the good, others can still consume it as well –
my consumption does not influence the ability of others to consume the good
These are so called public goods? = public goods are those that are i)
available to all (“nonexcludable”) and ii) that can be enjoyed over and over
again by anyone without diminishing the benefits they deliver to others
(“nonrival”)
Ex. clean air, security, international financial stability
Quasi-public goods = goods that are either non-exclusionary or non-rivalrous (i.e.
have one of the two characteristics of public goods)
> in practice, not a lot of goods will have both characteristic -> for that reason we
tend to use a broader definition of public goods with public goods being all goods and
services that we want to have that cannot be produced by the market mechanism
because if you would leave it up to the market mechanism they will not be produced
or underproduced (= underprovision)
Why would there be underprovision in that case? Free-riding -> we cannot rely on
the market mechanism to solve this problem so we need intervention that provides
these public goods
Public intervention necessary that takes up the production/ helps in realising
the production of this desirable thing
We need public instutions that have the mandate to provide that public good,
this public intervention will be made possible through taxes
1
,Global = broadening this to an international context > why? Air, pollution etc do not
know borders > these public goods are global in a sense which means that for those
kind of problems or desirable things it is desirable to have interventions also at the
international level
! But at international level the potential free-riding problem also exists, albeit within
states, which requires public intervention at global level.
There have always been global public goods by nature, but there are also public
goods that have become more global because of globalization (trade, finance,
movement of people, ...).
There are different technologies of provision/ production = the way in which
individual contribution by states or people are transferred into the global level of
supply of that good (> how individual contributions relate to the global provision)
-> examples?
Summation: the global supply is the sum of the individual contributions (ex.
individual initiatives to reduce pollution will help the global reduction) – idea
that everyone matters
not all public goods are produced by this summation technology, some public goods
are produced according to different technologies
Weakest link: correct technology for some global public goods > ex. people on
island where each person has own piece of the land, if the sea levels rise and
each person builds dams against the rise of the sea level > some build high
dams, others do not > different level of contribution efforts > irrespective of
the individual efforts, the global level of protection will be determined by the
contribution of the weakest link
What is the policy-consequence of this technology? You have to target the
weakest link and make them do better
Best shot: the collective level of protection/ provision is determined solely by
the level of intervention of the one with the highest contribution > this is often
refered to in problems with neglected tropical diseases for which there is not
yet a cure, pharmaceutical firms are not interested in this so you cannot rely
on market mechanism > public intervention > giving money to one institution
that has best chances to find vaccine
This reasoning of using the concept of global public goods explains why there are
global institutions that have a particular mandate > these institutions and their
mandate can be translated into a global public goods perspective
International financial stability = the government makes investment and takes
measures to prevent a financial crisis, this requires public intervention > when there
is a liberalisation of cross-border investments, national financial systems become
intertwined and connected and as a result, a financial crisis in country x can spill
over in other countries and cause a global financial crisis
> where the protection against national financial crisis is the lowest, chances for
crisis are the biggest -> weakest link
> mandate of IMF > to prevent a global financial crisis
2
,Optimal capital provision = worldwide capital flows, global allocation of capital from
people/ states with surplus of savings/ funds to those with shortage of savings >
funds worldwide directed to places where they are most needed > HOWEVER in
practice we do not see private capital going to those countries (!! We cannot rely on
market mechanism) > PUBLIC INTERVENTION by using public money to cure market
mechanism for example through instution such as world bank
> mandate world bank > to ensure countries in need receive those funds
II. The concept of balance of payments
Balance of payments = BoP = shows for a specific country all its (incoming and
outcoming) cross-border/ international transactions with other countries. For
example, the BoP of Tanzania reflects all the cross-border transactions of the
residents of Tanzania with the rest of the world (typically over a period of one year).
Historically, there were always two big parts in the BoP: the current account and the
capital account (together they are zero) – nowadays there are deemed to be three
parts (capital account was split into two parts): current account + capital account
+ financial account -> a BoP is always balanced meaning it always sums to zero
> we will be focussing on financial account transactions but still use certain old
terms and concepts of the two-structure:
Capital account opennes/ liberalisation = the extent to which as a country you
accept these cross-border transactions/ investments etc. = country-policy
decision to put yourself open to receive those kind of transactions and allow
your residents to do the same abroad
These transaction are strictly speaking no longer found on capital account but in the
financial account so technically wrong term but we still use the old term.
!! BoP always needs to be zero by nature -> why? Simple accounting; because of
system of double-entry-booking > every single cross-border transaction gives rise to
both debit and credit entry with same number but different sign (-)/(+) (but sub-parts
of the BoP don’t always equate to zero)
Example of cross-border transaction: international trade > export and import
> an export transaction: you have a good that is leaving and money (i.e.
foreign currency (dollar)) that is coming in) -> the money coming in will also
be registered in the BoP on a different line and will be the same amount as the
good leaving (export)
Foreign exchange = currency that are used/ accepted in trade worldwide -> this is a
limited set of currencies like the US dollar, the Euro, British pound, the Yen
(Currency needs to have international purchasing power > tanzanaian shilling for
example does not have this so resort will be made to us dollar or a similar currency)
3
, (us dollar is by far the most important currency) > what does this mean for a
currency as Tanzania? All transactions abroad need to be made in foreign currency >
how does Tanzania generate the dollars it needs? (because it cannot print them)
Through export, receiving foreign aid, foreign investment etc!! Tanzania can
generate the us dollars that it needs to pay for import by exporting
System is based on a limited set of currencies that are used in these international
transactions, if you are a country that does not have one of these accepted
currencies, you are constrained to your generation capacity of dollar income through
export, foreign aid and loans etc.
Potential problem: country that needs to import something but does not have
enough foreign exchange to do so > forced to look for ways/ sources to generate
foreign exchange
Everything that leads to foreign exchange inflow is positive +, meaning that the
forex inflow itself is –
Everything leading to a foreign exchange outflow is negative -, so the forex outflow
itself is +
Example: the export transaction itself will be recorded with a + so the foreign
exchange inflow itself is a - // foreign direct investor makes FDI in country, the FDI
transaction will be recorded with a + so the forex inflow itself is registered with a -
Credit (+) everything needed for foreign exchange (= forex) inflows
Debit (-) minus sign is good for forex! + is bad because it means you have
lowered your forex
In practice there can be errors and ommissions causing the sum not to be zero ->
solution: we make it zero by adding a line called errors and ommissions with the
necessary amount to make the sum zero > the errors and omissions line (and
magniture thereof) can mean there are quite some transactions not properly
registered because illegal so could be a red flag
Slide with concrete example: the BoP from the perspective of developing country ->
keep in mind; three parts
1) Current account
(i) international trade transactions
Export is + (because it leads to forex inflow)
Import is – (because it leads to forex outflow)
--> the export/ import transaction will be booked under (i) -> where do we put the
forex transaction? Under (xi) the second leg of the transaction will be booked (with
the opposite sign as under (i))
!! – sign in forex is good because it entails a increase in forex (=> this is simply the
rule, the way it is)
In the present case, the import is higher than the export --> what does this mean for
the trade balance? We have a trade balance deficit (>< surplus when export >
4
international economic
organizations
Class 1: introduction – 30/09/2025
I. international economics: a global public goods approach
Private goods = good that are produced by the market mechanism (market
mechanism = supply and demand determine the price of the good)
-> most goods can be produced through the market mechanism because they are i)
excludable and ii) rivalrous meaning that i) if you don’t pay the market price, you can
be excluded from the consumption of that good and ii) If you consume the good the
good is no longer available for others to consume
However, there are also goods/ desirable things to be produced, for which it is not
possible/ straightforward to use the market mechanism to make them because they
are i. non-exclusionary and/or ii. non-rivalrous meaning that i. when they are
produced you cannot exclude people from benefiting from the good even if they do
not pay and/ or ii. even if you consume the good, others can still consume it as well –
my consumption does not influence the ability of others to consume the good
These are so called public goods? = public goods are those that are i)
available to all (“nonexcludable”) and ii) that can be enjoyed over and over
again by anyone without diminishing the benefits they deliver to others
(“nonrival”)
Ex. clean air, security, international financial stability
Quasi-public goods = goods that are either non-exclusionary or non-rivalrous (i.e.
have one of the two characteristics of public goods)
> in practice, not a lot of goods will have both characteristic -> for that reason we
tend to use a broader definition of public goods with public goods being all goods and
services that we want to have that cannot be produced by the market mechanism
because if you would leave it up to the market mechanism they will not be produced
or underproduced (= underprovision)
Why would there be underprovision in that case? Free-riding -> we cannot rely on
the market mechanism to solve this problem so we need intervention that provides
these public goods
Public intervention necessary that takes up the production/ helps in realising
the production of this desirable thing
We need public instutions that have the mandate to provide that public good,
this public intervention will be made possible through taxes
1
,Global = broadening this to an international context > why? Air, pollution etc do not
know borders > these public goods are global in a sense which means that for those
kind of problems or desirable things it is desirable to have interventions also at the
international level
! But at international level the potential free-riding problem also exists, albeit within
states, which requires public intervention at global level.
There have always been global public goods by nature, but there are also public
goods that have become more global because of globalization (trade, finance,
movement of people, ...).
There are different technologies of provision/ production = the way in which
individual contribution by states or people are transferred into the global level of
supply of that good (> how individual contributions relate to the global provision)
-> examples?
Summation: the global supply is the sum of the individual contributions (ex.
individual initiatives to reduce pollution will help the global reduction) – idea
that everyone matters
not all public goods are produced by this summation technology, some public goods
are produced according to different technologies
Weakest link: correct technology for some global public goods > ex. people on
island where each person has own piece of the land, if the sea levels rise and
each person builds dams against the rise of the sea level > some build high
dams, others do not > different level of contribution efforts > irrespective of
the individual efforts, the global level of protection will be determined by the
contribution of the weakest link
What is the policy-consequence of this technology? You have to target the
weakest link and make them do better
Best shot: the collective level of protection/ provision is determined solely by
the level of intervention of the one with the highest contribution > this is often
refered to in problems with neglected tropical diseases for which there is not
yet a cure, pharmaceutical firms are not interested in this so you cannot rely
on market mechanism > public intervention > giving money to one institution
that has best chances to find vaccine
This reasoning of using the concept of global public goods explains why there are
global institutions that have a particular mandate > these institutions and their
mandate can be translated into a global public goods perspective
International financial stability = the government makes investment and takes
measures to prevent a financial crisis, this requires public intervention > when there
is a liberalisation of cross-border investments, national financial systems become
intertwined and connected and as a result, a financial crisis in country x can spill
over in other countries and cause a global financial crisis
> where the protection against national financial crisis is the lowest, chances for
crisis are the biggest -> weakest link
> mandate of IMF > to prevent a global financial crisis
2
,Optimal capital provision = worldwide capital flows, global allocation of capital from
people/ states with surplus of savings/ funds to those with shortage of savings >
funds worldwide directed to places where they are most needed > HOWEVER in
practice we do not see private capital going to those countries (!! We cannot rely on
market mechanism) > PUBLIC INTERVENTION by using public money to cure market
mechanism for example through instution such as world bank
> mandate world bank > to ensure countries in need receive those funds
II. The concept of balance of payments
Balance of payments = BoP = shows for a specific country all its (incoming and
outcoming) cross-border/ international transactions with other countries. For
example, the BoP of Tanzania reflects all the cross-border transactions of the
residents of Tanzania with the rest of the world (typically over a period of one year).
Historically, there were always two big parts in the BoP: the current account and the
capital account (together they are zero) – nowadays there are deemed to be three
parts (capital account was split into two parts): current account + capital account
+ financial account -> a BoP is always balanced meaning it always sums to zero
> we will be focussing on financial account transactions but still use certain old
terms and concepts of the two-structure:
Capital account opennes/ liberalisation = the extent to which as a country you
accept these cross-border transactions/ investments etc. = country-policy
decision to put yourself open to receive those kind of transactions and allow
your residents to do the same abroad
These transaction are strictly speaking no longer found on capital account but in the
financial account so technically wrong term but we still use the old term.
!! BoP always needs to be zero by nature -> why? Simple accounting; because of
system of double-entry-booking > every single cross-border transaction gives rise to
both debit and credit entry with same number but different sign (-)/(+) (but sub-parts
of the BoP don’t always equate to zero)
Example of cross-border transaction: international trade > export and import
> an export transaction: you have a good that is leaving and money (i.e.
foreign currency (dollar)) that is coming in) -> the money coming in will also
be registered in the BoP on a different line and will be the same amount as the
good leaving (export)
Foreign exchange = currency that are used/ accepted in trade worldwide -> this is a
limited set of currencies like the US dollar, the Euro, British pound, the Yen
(Currency needs to have international purchasing power > tanzanaian shilling for
example does not have this so resort will be made to us dollar or a similar currency)
3
, (us dollar is by far the most important currency) > what does this mean for a
currency as Tanzania? All transactions abroad need to be made in foreign currency >
how does Tanzania generate the dollars it needs? (because it cannot print them)
Through export, receiving foreign aid, foreign investment etc!! Tanzania can
generate the us dollars that it needs to pay for import by exporting
System is based on a limited set of currencies that are used in these international
transactions, if you are a country that does not have one of these accepted
currencies, you are constrained to your generation capacity of dollar income through
export, foreign aid and loans etc.
Potential problem: country that needs to import something but does not have
enough foreign exchange to do so > forced to look for ways/ sources to generate
foreign exchange
Everything that leads to foreign exchange inflow is positive +, meaning that the
forex inflow itself is –
Everything leading to a foreign exchange outflow is negative -, so the forex outflow
itself is +
Example: the export transaction itself will be recorded with a + so the foreign
exchange inflow itself is a - // foreign direct investor makes FDI in country, the FDI
transaction will be recorded with a + so the forex inflow itself is registered with a -
Credit (+) everything needed for foreign exchange (= forex) inflows
Debit (-) minus sign is good for forex! + is bad because it means you have
lowered your forex
In practice there can be errors and ommissions causing the sum not to be zero ->
solution: we make it zero by adding a line called errors and ommissions with the
necessary amount to make the sum zero > the errors and omissions line (and
magniture thereof) can mean there are quite some transactions not properly
registered because illegal so could be a red flag
Slide with concrete example: the BoP from the perspective of developing country ->
keep in mind; three parts
1) Current account
(i) international trade transactions
Export is + (because it leads to forex inflow)
Import is – (because it leads to forex outflow)
--> the export/ import transaction will be booked under (i) -> where do we put the
forex transaction? Under (xi) the second leg of the transaction will be booked (with
the opposite sign as under (i))
!! – sign in forex is good because it entails a increase in forex (=> this is simply the
rule, the way it is)
In the present case, the import is higher than the export --> what does this mean for
the trade balance? We have a trade balance deficit (>< surplus when export >
4
